Fed's Lacker: 'Living Wills' Best Hope to Avert Bank Bailouts

Federal Reserve Bank of Richmond President Jeffrey Lacker said the best way to prevent more taxpayer-funded rescues of failing banks is with “living wills” that outline how troubled institutions may be unwound.

Resolution planning is the “only approach I can envision” to solving too-big-to-fail, Lacker said in a speech to the Council on Foreign Relations in New York, delivering comments abridged from remarks he first gave on April 9.

The effort to have large bank holding companies submit the plans “will require more hard work and detailed analysis,” Lacker said. “But I see no other way to reliably identify exactly what changes are needed in the structure and operations of financial institutions to end ‘too big to fail.’”

U.S. lawmakers and Fed officials are planning new ways to prevent another taxpayer bailout of one of the biggest banks. The 2010 Dodd-Frank Act required lenders to determine how they would be wound down if they fail. The Fed said in March that 17 of the 18 largest banks could survive a deep recession while maintaining enough capital to meet regulatory requirements.

Regulators seeking to reduce the chances of another government rescue have required banks to retain some earnings and reinforce their buffers against possible losses. New international and domestic banking rules are also guiding banks toward stronger capitalization.

Senators Sherrod Brown, an Ohio Democrat, and Republican David Vitter of Louisiana announced legislation last month that would impose a 15 percent capital requirement for the largest banks, saying that Dodd-Frank doesn’t prevent future bailouts.

The bill faces opposition. Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, has said regulators should finish work on Dodd-Frank before evaluating whether it solves too-big-to-fail.

The panel’s top Republican, Idaho’s Mike Crapo, has said setting capital is a job for regulators not Congress. And House Financial Services Committee Chairman Jeb Hensarling, a Texas Republican, has said he favors bankruptcy reform over downsizing the largest lenders.